Woolies hands back $400m to investors

Woolworths
posted strong first half profits and said it would buy $400 million of its own shares, bowing to pressure from shareholders unhappy with poor returns for the past year.

In a tweaking of its strategy, Australia’s largest retailer said it wouldn’t spend as much on refurbishing stores as planned. It also plans to cut prices in its Australian supermarkets to fight off competition from Coles and two low-cost operators expanding in Australia, Aldi and CostCo.

Woolworths shares have fallen 4 per cent in the past 12 months, while the ASX 200 index has risen 38 per cent. Rival Coles, which is owned by
Wesfarmers
, has delivered better same-store sales growth for the last two quarters.

The approach was announced on Friday by chief executive
Michael Luscombe
and suggests Woolworths is stepping up the “double loop" business model that underpinned its 10-year record of double-digit profit growth.

Mr Luscombe was confident the model – which involves reducing costs and lowering prices to drive sales – will deliver strong profit growth and shareholder returns over the longer term.

He rejected suggestions that Woolworths’ glory days were over. “Anyone who thinks the end of the golden era for Woolies is on the horizon is sadly mistaken."

The retailer reported an 11.4 per cent increase in net profit to $1.095 billion for the six months ended December. It reaffirmed its forecast for 8 and 11 per cent profit growth for the full year.

Mr Luscombe said the second half would be more challenging because of low inflation and the absence of fiscal stimulus spending from the government, which had boosted sales in the June half of 2009. But Woolworths needs to lift net profit by only about 4 per cent to achieve the low end of its guidance, and by 6.5 per cent to achieve 11 per cent profit growth.

Related Quotes

Company Profile

The company has boosted net profit by an average 21 per cent a year over the past 10 years, fuelled by acquisitions, market share gains and improved productivity.

The December-half results, achieved on sales growth of 6 per cent (excluding petrol), beat market forecasts for net profit growth of about 10 per cent to $1.08 billion.

However, fund managers and analysts noted that Woolworths’s cost of doing business had risen for the first time in years and earnings per share growth failed to match profit growth.

Woolworths increased its interim dividend by 10.4 per cent to 53¢ a share and said it would buy back $400 million of shares on-market. The buyback, the first since 2004, suggests a renewed focus on shareholder returns and will help make up for a disappointing share price performance in the past year.

Mr Luscombe said more capital management was likely next year and it was investing in its new hardware venture. Woolworths was also keen to buy more gaming machines in Victoria, he said.

The $400 million plan falls short of the $800 million-$1.4 billion analysts believe Woolworths is capable of buying back. But Woolworths took into account future funding requirements, continued uncertainty in the global economy and its credit rating, which was affirmed by Moody’s.

“Woolworths’ first-half result typifies the nature of its business – steady growth, strong cash flow, and disciplined capital management," said Citigroup analyst Craig Woolford in a note.

Earnings from Australian food and liquor stores rose by 11.4 per cent to a better than expected $1.3 billion and would have been higher if Woolworths had not invested $120 million over the past eight months in reducing grocery prices. Big W also delivered a solid result, lifting earnings by 6 per cent despite soft sales growth.

Earnings from consumer electronics rose 20.4 per cent, buoyed by the success of the new Dick Smith format.